Boards and CEOS Face New Tensions

Why do you think tension between CEOs and boards is growing?

Particularly in companies where performance is less than desired, there is a need to make things better. And boards have limited ability to improve company performance other than to lean on the CEO, and most CEOs cannot generate improved results overnight.

We've seen a number of high-profile CEOs leave lately. Is that an outcome of this tension?

It's the CEO's job to continually improve performance, and sometimes you can only play the 52 cards you were dealt. I think compensation issues also have created tension. Look at the fishbowl in which CEOs live today and the pressure from activists, shareholders and governance groups. Boards have been required to justify the compensation they're giving to CEOs, and sometimes that's not a comfortable thing to do.

Is the new tone a result of all the shareholder pressure?

We're seeing a tremendous amount of shareholder activism. That puts stress on the CEO, and it puts a lot of stress on directors who will be hearing from shareholders who are unhappy about the CEOs or the company's performance. That puts a strain on the relationship.

Also, in fairness, in keeping with the New York Stock Exchange rules, whenever you have executive sessions at a board meeting, you exclude the CEO so you have the directors talking among themselves about the CEO. If the company is not performing, obviously directors are talking about things that aren't going right, and that can have an impact on the relationship.

What happens in a situation like that of General Motors, where Kirk Kerkorian wanted to transform the company?

It's the board's job to figure out whether a transformation is in the best interests of shareholders. Boards are being called upon more and more today to determine whether or not a huge consolidation or partnership with other corporations is in the best interests of the company. There can be a lot of tension in the boardroom when you have a 9.9 percent shareholder on the board who is advocating a certain transaction and the CEO doesn't think that's the right approach. Directors then have a difficult decision and in that regard a limited amount of time.

It's not that directors aren't smart enough. It's the time commitment. If you're going to make decisions that are so important to shareholders, directors have to rely on experts. They have to spend time trying to understand the issues. Nobody joins a board for the director's fee and meeting fee, and nobody expects a whole lot of their time to be devoted to the company beyond board meetings. Most directors have jobs. They have time pressures.

In your view, are some shareholders being unrealistic in believing that directors should manage?

I don't believe directors can or should manage a company. That's not the role of a director. A director has oversight responsibility. A good board, in my experience, is one that chooses good people to lead the company and takes succession and the selection of the CEO as the primary function. It is also involved in the creation of the strategic vision for the business of the company. A good board is cognizant of the company's financial condition and the results of operations. It makes sure there are good controls and makes sure there is no fraud in the organization. It's very hard to do much more than that. Directors can't manage the business on a day-to-day basis.

But the activists seem to be implying just that—"We expect you, the board, to discipline management in ways that you never have before."

I'm not sure that's right. One of the most important things a board does aside from selecting good management is to properly incentivize management to achieve results. That's the way boards best get into operations.

Of course, you have to distinguish between companies that are doing well and those that are doing poorly. If a company is doing poorly, but it has terrific brands, for example, one would think that a board might have people with an understanding of branding and that they could be helpful in giving good ideas to management. That's why you try to have diverse disciplines on a board. But what they can't do is get into the plants to make sure productivity is what it should be or that they are using the right ingredients in making a product. Those are management functions.

So the activists are misguided?